Definition of Accounting Reliability:
In an accounting system, it is the recording of such procedures or transactions that can be verified with objective evidence.
In simple words, it is the set of financial information that can be verified with the same results consistently when used by the investors or creditors. In other words, it’s the trustworthiness associated with the financial statements. If the information cannot be trusted upon then it is just a useless piece of information.
It has certain characteristics that must be fulfilled before considering it a reliable set of information.
It should be verifiable when different measures are taken to check the authenticity of information. The results should remain same or consistent with what so ever method applied in association with it.
The auditors or third party people should be able to evaluate any financial statement of the company with similar results. If the results do not conform to the issued financial statements, it means it is not verifiable. So such information becomes unreliable.
The information should be 100% authentic. The financial statement should include the accurate values of financial proceedings in that particular time period.
For example, if a company’s financial statements include: the cost of sold goods was $45,000. Whereas in reality, it was $40,000. So the information is not accurate. It doesn’t come under the category of reliable sets of information.
This wrong information may lead to very wrong decisions or steps taken upon with the help of this information. So an unauthentic piece of information is clearly unreliable information.
For the information to be reliable, it should have the quality of being completely neutral. For example, the financial statements issued by the XYZ Company’s management are biased.They show statements in favor of the company in terms of progress or productivity. In actual the picture is contrary or the statements aren’t in accordance with the accurate records.
So it has not qualified as the reliable statement as it is biased and is not neutral. This information becomes useless and unreliable because no appropriate steps can be taken with this set of biased information. Financial statements become completely useless if their recordings are inaccurate or unreliable. The problem comes is that by looking at those statements you can’t judge whether they are accurate or not.
There are two main factors behind the unreliable information. One is ‘deliberate dishonesty’. The other is ‘incompetency’. There are certain methods to combat this evil.
The first factor can be nullified by hiring the accounting firms for auditing those financial statements. Proper internal controls should be there to prevent financial statements.
Internal controls mean the procedures and policies that company can set to protect their assets, ensure the accuracy of all financial statements, and prevention of any inaccurate processes inside the company.
These both methods of regular outside auditor and proper internal control environment are affordable with the larger companies. The problems come with smaller companies since for a simple and few financial statement; both these procedures cost a lot.
The regular audits if ignored in the case of small business settings may not alter the facts that much. The internal control is very important. It helps in prevention of any frauds, thefts and many accounting errors. Hence, internal control is most important in this regard of the reliability of financial statements.
The key features of this reliability principal can be summarized as
- It should be completely accurate.
- It should be free from all sorts of biases.
- It must be the actual reporting’s if the events
- The third party if inspects that information should have same results.